MBIA Inc (MBI) 2015 Q1 法說會逐字稿

Welcome to the MBIA Inc. first-quarter 2015 financial results conference call. I would now like to turn the call over to Greg Diamond, Managing Director of Investor Relations at MBIA. Please go ahead.

Thank you, Maria. Welcome to MBIA's conference call for our first-quarter 2015 financial results. After the market closed yesterday, we issued and posted several items on our website, including our financial results press release, our 10-Q, our quarterly operating supplements, and the statutory financial statements for MBIA Insurance Corporation and National Public Finance Guarantee Corporation. We also posted updates to our insured portfolio listings.

Please note that anything said on today's call is qualified by the information provided in the Company's 10-Q, 10-K, and other SEC filings, as our Company's definitive disclosures are incorporated in those documents. We urge investors to read our 10-K from 2014 and our first quarter 2015 10-Q as they contain our most current disclosures about the Company and its financial and operating results. The 10-K and 10-Q also contain information that may not be addressed on today's call.

Regarding the non-GAAP terms included in our remarks today, the definitions and reconciliations of those items may be found in our most recent 10-K and 10-Q, financial results press release and the quarterly operating supplements. The recorded replay of today's call will become available approximately one hour after the end of the call, and the information for accessing it is included in yesterday's financial results press release.

And now here is our Safe Harbor disclosure statement. Our remarks on today's conference call may contain forward-looking statements. Important factors, such as general market conditions and the competitive environment, could cause our actual results to be materially different than the projected results referenced in our forward-looking statements. Risk factors are detailed in our 10-K which is available on our website at MBIA.com. The Company cautions not to place undue reliance on any such forward-looking statements. The Company also undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such statement is no longer accurate.

For our call today, Jay Brown, Bill Fallon and Chuck Chaplin will provide some brief introductory comments. Then the team will be open for a question-and-answer session that will follow. Now here is Jay.

Thank you, Greg. Little has happened that impacts our financial results since our year-end 2014 conference call on March 3. Speaking historically, that would be good news for a bond insurer. That's what we should expect to happen in our business over the short run -- very little. So, where we are continuing to see a return to business as usual.

Following me, Bill will cover National and provide an update on Puerto Rico and Chuck will take you through our financial results. In the meantime, I'd like to address a few items.

Looking at our non-GAAP measure of combined operating income, our first-quarter result was a bit lower than in the first quarter of 2014, coming in at $34 million compared to $40 million last year. There are a couple of factors that affect that comparison, which Chuck will take you through in greater detail.

But, more generally, declining scheduled premium earnings due to our shrinking insured portfolio, and constrained investment income due to the lack of safe, higher yielding opportunities, has continued to create some headwinds for us. However, we are slowly improving our market penetration in National while maintaining our pricing and underwriting discipline, and we did have a net release of loss reserves in the quarter.

Our Puerto Rico exposure continues to be a significant focal point and the developments we've seen, both in the first quarter and since March 31, haven't changed our view on the ultimate loss potential. Our operating income, combined with share repurchases and the favorable impact of foreign exchange rates contributed to an increase of $0.91 per share in our adjusted book value per share measure, improving it to $25.78.

In MBIA Corp., where our strategy is to pay all claims, maximize the margin of safety for our policyholders, and ultimately generate sufficient surplus to enable payments to the surplus note holders, both statutory capital and liquidity were virtually unchanged from year-end 2014, while par insured declined by 6% to $52 billion. National's insured portfolio also declined by 6% during the quarter to $210 billion in gross par outstanding. It will take a few years for the pace of National's new business writings to increase sufficiently to replace the existing policies that are either maturing or being refunded.

In the meantime we have been looking at additional ways to generate value for our shareholders. More specifically, between the beginning of the year and May 5, we bought back over 10 million shares at a cost of $93 million. We believe this investment is significantly accretive and reduces shares outstanding by over 5%. We have used a bit over half of the $200 million Board authorization we got last year.

With the low interest rate environment fueling large refunding volume, National's excess capital position has been growing very rapidly and at a rate that far exceeds what is needed to support the existing portfolio and our new business objectives. Our goal is to deploy some of that excess, ideally through an extraordinary dividend to the Holding Company. However, we do not anticipate seeking approval for such a dividend from our regulator until there is better clarity around our Puerto Rico exposures.

Given our revenue constraints, we continue to focus on further reducing expenses. On January 1, we closed the sale of Cutwater to Bank of New York's inside subsidiary at a modest gain. We are also streamlining our non-US insurance operations, eliminating branches and subsidiaries where possible.

We have wound down our French branch and we're in discussions to eliminate our subsidiary in Mexico. We sold our former headquarters in Armonk last week after moving into a smaller and less expensive location last fall.

The net impact of all this activity will be several million dollars of savings per year. So, while our primary goal is to profitably increase National's new business volume and market share, we will continue to pursue other opportunities to grow our earnings and returns.

Now Bill will review the progress we're making in National before Chuck provides a more detailed overview of our financial results.

Thanks, Jay. We have previously discussed the headwinds National faces. While our most significant competitor in this low interest rate environment continues to be the uninsured market, we also need to enhance our marketing efforts.

We hired Tom Weyl in January and the early results from his efforts are encouraging. After wrapping two deals in 2014, we've insured or have been selected to insure 10 deals through today, representing about $614 million of total par.

Tom is hiring additional sales and marketing professionals which should give us more boots on the ground to communicate with investors and issuers across the country. The quality of the deals we are underwriting has been consistent with our business plan, averaging low A underlying credit quality.

In the insured portfolio, uncertainty over Puerto Rico commands a lot of attention. We continue to work with Puerto Rico's government, its advisors and other creditors to craft the consensual solution to its current credit and liquidity issues.

PREPA, which is operating under a forbearance agreement with its major creditors, is the immediate focus. We are confident that its stability and financial performance can be improved through thoughtful planning and good faith negotiation. In the longer term, however, economic growth will be needed to help the commonwealth resolve its financial issues while insuring an adequate standard of living for its citizens.

We've also been closely monitoring two large investment grade exposures -- Chicago's general obligation bonds and the Chicago Board of Education. The City of Chicago faces potential stresses from payment into the pension system required in the next year and the teacher's contract that expires next month.

Meanwhile, Moody's downgraded both credits this winter, triggering swap settlements. It is too soon to know how this will work out but Chicago's large, robust and diverse economy gives it a degree of flexibility that makes it very different than Detroit.

Overall, our $210 billion insured portfolio is performing well. Aside from the credits I mentioned, our exposures over $1 billion are well into investment grade status. Based on National's credit assessments, the low investment grade rated credits amount to only 1.5% of the portfolio today.

The rating agencies will be conducting their annual reviews of us in the near future. One outcome of that will be a reassessment of the excess capital position in National. I'm expecting that we will have capital that exceeds the AAA level by over $1 billion under S&P's model and, as Jay mentioned, we will be looking at ways to deploy a portion of that amount after there's more clarity on our Puerto Rico exposures.

We are on track with our as of right dividend for 2015 of approximately $115 million. And we remain confident that National has sufficient financial resources to honor its obligations to its insured bondholders.

Now I'll turn it over to Chuck to discuss the financial results.

Great, thanks, Bill. And good morning, everyone. First, our net income. Net income in the first quarter of 2015 on a consolidated GAAP basis was $69 million compared to $256 million in the Q1 of 2014. The pretax net gain on insured credit derivatives was $28 million in this year's quarter, compared to $469 million in Q1 2014.

In addition to our GAAP results we also report non-GAAP measures that we believe provide additional context for our operating performance. Our combined operating income, which reflects the results of our public finance insurance segment and our corporate segment was $34 million or $0.18 per share. Operating income was $40 million in last year's first quarter.

Premiums net of DAC amortization were higher but investment income and loss expense both had adverse comparison. We also took a final writedown to our former headquarters facility in Armonk. Sequentially, the first quarter represented about a $12 million improvement over the fourth quarter of 2014.

We believe that operating income measures the periodic performance set in years to the benefit of our shareholders. And it's important to note that, while operating income includes an accounting provision for income taxes, we don't expect to pay cash taxes other than AMT for some time to come.

In addition to combined operating income, we also report adjusted book value which was $25.78 per share as of March 31, 2015 compared to $24.87 per share at year-end 2014, primarily driven by the share repurchase activity that Jay mentioned already plus gains on foreign exchange. The FX driver here is the appreciation of the US dollar versus the euro from 1.21 euro to 1.07 and that contributed about $0.23 per share to ABV. A 10% change in the value of the euro would create about a $0.20 impact on ABV per share. And reconciliations of operating income and ABV to the relevant consolidated GAAP numbers are included in our press release, our operating supplement and our Form 10-Q.

At the segment level, National contributed $56 million of operating income compared to $61 million in 2014's first quarter. While premiums were about $20 million higher on refunding volumes, investment income was about $5 million lower and expenses were higher, as well.

Loss in LAE was a net negative amount in the quarter, while it was a larger negative expense than last year's first quarter when we reduced reserves related to our Detroit exposures, and the difference was about $8 million. DAC amortization rose in line with premium revenue. And operating expenses were also modestly higher.

Our refundings, the source of the higher premium, have been difficult to forecast. In Q1 2015, we saw $50 million of refunding income on $7 billion of par. In last year's first quarter, we had $22 million of refunded premium on $4 billion of par.

So, we don't expect that $50 million as a run rate but the current very low interest rates continue to be conducive to refunding activities. The total amount of unearned, up-front premiums and expected installment premiums in National's back book are about $1.3 billion.

Jay and Bill have both referenced National's capital adequacy which we continue to see as quite strong. Excess capital grows at the back book amortizes due to maturities and refunding. And deployment of this capital to support new business within or outside National is a key strategic focus for us.

Excess capital could be more than one-third of National's statutory capital of $3.3 billion as of March 31, 2015. We will be working to get some of this excess capital deployed as we get greater clarity around the Puerto Rico credits.

The corporate segment had an operating loss of $22 million compared to a loss of $21 million in 2014. The net gain losses on financial instruments at fair value and foreign exchange items was driven by our decision to close out some received fixed swaps into Q1.

We collected a termination amount providing a one-time boost to liquidity, but then incur higher net interest expense on the remaining swaps which does affect our operating income. Market risk-wise, this exposes us to unrealized loss if rates fall but it will provide both economic and liquidity benefits if and when rates rise.

Liquidity at the Holding Company was $567 million at the end of the quarter compared to $498 million at the end of 2014. $228 million was released from the tax escrow in January and we spent approximately $76 million on share buybacks in the first quarter and then $93 million through May 5. These buybacks reduced shares outstanding by 5.5%.

Our debt-to-capital ratio still improved in the quarter driven by operating income, the benefit of foreign exchange and debt reduction. A 10% change in the dollar/euro cross would affect our debt-to-capital ratio by about 1%. Finally, we believe we're still on track to reach a middle investment grade debt-to-capital ratio by year-end 2018.

Moving on to MBIA Corp., it ended March 2015 with the statutory capital of $857 million compared to $859 million at year-end 2014. Net income was positive, about $3 million. And the results of our UK subsidiary, which are treated on the equity method, and affects surplus but not net income, the UK subsidiary was also profitable on a local currency basis. But the translation of our sterling balance sheet to US dollar is largely responsible for keeping stat capital basically flat versus year-end.

Liquidity in MBIA Corp. at quarter's end was $415 million, after beginning the year at $443 million. This is an adequate position given the risks that we know that we face.

We do have a bullet maturity coming up in November on the first of the Zohar CLOs of about $154 million. We believe our liquidity position will be able to absorb the absolute worst case outcome on this in 2015.

A larger of the two CLOs matures in 2017 but that's too distant for an accurate liquidity forecast. And we continue to expect that a negotiated refinancing of all of the companies that back up the loans in the two Zohar CLOs will be optimal for all parties.

Another significant liquidity uncertainty item on the horizon for MBIA Corp. will be the collection from Credit Suisse related to representation and warranty violations. Our actual damages, which we are seeking in litigation, are well beyond the $371 million that we recorded to the balance sheet. We are confident about the collection and the amount but there is significant uncertainty about the timing.

Finally, as Jay has said, it's been a pretty quiet quarter. We continue to push to find ways to become more capital efficient, to reduce debt at the Holding Company, and provide additional sources of cash flows and returns for our shareholders.

At this point, we will open up the line for your questions.

(Operator Instructions)

Our first question comes from the line of Brett Gibson of JPMorgan.

Great, thank you. Good morning, gentlemen. A couple of questions for you. First, I wanted to talk about Corp. liquidity. This quarter, operating expenses were about $19 million. That's been about flat over the last few quarters and I'm a little surprised that hasn't come down. Can you talk about the long-term expense structure for Corp. and where we should expect that to trend over time?

Sure. We've had some expense reductions that affect the corporate segment and MBIA Corp. And I think your question is specific to MBIA Corp., right?

Yes.

Over the past couple of years. So, we had a significant reduction in 2013 that played out over the course of 2014 as we got the full benefit of that. We would expect that expenses will continue to decline but at a somewhat slower pace than we saw over 2013 to 2014.

Okay. Second, continuing with Corp., I want to talk about the excess spread reserve of $542 million. How sensitive is that to interest rate movements? For example, if interest rates were to rise by another 50 basis points what would the affect be on the level of excess spread there?

Yes, I don't know that we believe that it is sensitive enough to interest rates to actually create an equation. But interest rates do affect excess spread to the extent that it enhances the prepayment ability of the individual mortgagors. So, we have seen that as rates fell in first quarter of 2015 that we did have some elevated prepayment experience.

Okay. Lastly, I just want to talk about Puerto Rico. Really, just from a high level, how do you think about the prospect of wrapping all or part of a potential new issue out of Puerto Rico? And then more conceptually, how do you think about increasing exposure to a counterparty in distress, the puts and takes of that?

It's Bill speaking. In terms of Puerto Rico -- and again I think you mentioned the emphasis is conceptually -- if, in fact, there was a benefit to National to wrapping a new deal we would obviously consider that. So, it's really hard in the absence of any details to talk about what we would or wouldn't do.

As you know, as an example in Detroit there was a wrap that both Assured and National provided with regard to Detroit Water and sewer, as that got restructured and refinanced. So, again, in National's case we thought that was beneficial to National to do that. Again, very different in terms of details but if there was a similar set of circumstances in Puerto Rico, we would consider doing that.

Great, thank you very much.

Our next question comes from the line of Brian Charles of Pressprich.

Good morning. I just have a couple questions, one regarding MBIA Corp. I'm looking at your supplement on page 27. In the middle of the page you have the table that has the case and salvage reserves for your Corp. exposure. And I saw that your CDO exposure, or at least your case reserves, went down by about $13 million -- $373 million at year end and $360 million at the first quarter. And I'm wondering, did that have to do with your BBB CMBS exposure? And was it influenced at all by any reserves you might have taken for your Zohar exposure?

No, it doesn't. Both CMBS exposure has been pretty stable, although we do have the one transaction that we acknowledge that we're paying claims on, and there's no change in the Zohar reserve in the quarter. The change that you see is spread across a handful of transactions so there's no dominant characteristic that I was thinking about there.

Okay, and also, what is the size of that one CMBS exposure that you're paying out on? It used to be about $300 million, is that right?

The remaining par is a little bit under $300 million at this point.

Okay, thanks. And then, secondly, just one more question about the excess spread. The calculation that you have right now, are you assuming interest rates stay stable from this point? Or are you expecting them to rise or go down a little bit in your calculation that comes up with the current excess spread count?

We use the forward curve for interest rates but we do have an expectation that the elevated level that we observe today in Q1 does persist for several more quarters.

Okay, good enough. All right, thank you.

Remember, when you think about interest rates and excess spread, there's two factors at play there. There's the actual difference between what is received on the mortgages versus what's paid out. That's obviously effective negatively as interest rates rise. The other side of it is prepayments slowdown when interest rates rise so it's not a precise negative movement at one time. You have both factors working in tandem so it's more muted than you might think it would normally be for a 1% or a 2% change in interest rates.

Okay. Good, thank you.

Our next question comes from the line of Nagendra Jayanty, Claren Road.

Thanks for the time today. I had two questions related to Corp. The first one is on the operational cash flow and liquidity in the operating supplement, it noted that there was $6 million of cash premiums that came in, and that was lower than what we've seen in the prior year and years past. Just wondering if you had a comment on why that was the case and if we should expect that going forward?

The book of business is simply running off. That's all that's going on.

Okay, so we should expect that number to be in that area? Given the future cash premiums that are expected this quarter seemed like a low number versus what is projected.

There's actually a table that shows the expected future premiums. And, as Jay was pointing out, the $6 million is affected by a reinsurance payment that was made in the quarter.

Okay, got it, perfect.

It's net of that range.

Reinsurance payment, okay. The second question is, I may have written this down wrong but I'm unable to go back and look at your multi-sector CDOs by name, but it looked like at the end of last quarter there's a multi-sector CDO Number 51 that was approximately $78.671 million of UPB. And I didn't find it in your exposures this quarter, so I was wondering if that had been commuted or if I'm just looking at that wrong, if it doesn't really exist anymore.

I know there were no commutations in the first quarter. Again, that book of business is amortizing and from time to time deals simply mature or are unwound.

Perfect, thank you very much.

(Operator Instructions)

Our next question comes from the line of Geoffrey Dunn of Dowling & Partners.

Thank you, good morning. As you think about Puerto Rico and trying to get more clarity on the exposure there, is the issue really centered around PREPA? Or, as you think about the ability to go talk to regulators about special dividends, is it a broader issue with the other exposures there, which I think, as you noted in the commentary, that it's going to take awhile for the economy to turn around and really firm things up for them financially? As you think about what needs to be the milestone markers to talk to regulators, what are we really trying to watch here?

Geoff, it's Bill. With regard to the near term the focus is really on PREPA. As you know, that's gotten most of the attention and that is the one that we're very focused on right now.

We think the other credits as they pertain to our book don't have the volatility and don't have the same issues that PREPA does so I think it's really a phased approach. One would be PREPA, which when there is restructuring, which we hope happens soon, and is beneficial, that that should reduce the volatility which would allow us, as Jay mentioned, to have conversations and requests for excess or extraordinary dividends. Then there will be a second phase which is the long-term economy in Puerto Rico and the impact on the rest of the credits.

Okay, great, thank you.

We do have a question from the line of Jeff Rosenkranz of Cedar Ridge Partners.

Good morning, guys. Another question on Puerto Rico. Obviously there's a lot of fiscal stress and they're going through a process here. But taking a step back can you maybe talk about it? It seems from the outside that maybe the bigger problem or the bigger challenge is a lack of leadership maybe on the island. The governor's popularity is quite low and the rollout of various iterations of tax reform hasn't been very successful. Can you maybe address your ability to negotiate and resolve this favorably in light of maybe a lack of leadership politically?

Yes, Jeff, with regard to Puerto Rico, it is a very dynamic and very complicated situation, as you just alluded to. I think the complication is that it wasn't created by one administration so the problems we find in Puerto Rico and, to be fair, we find in other situations, typically have built up over many years. I think actually the things that this administration has done in just over two years is actually quite positive when you look at some of the changes.

Now, you did reference the recent tax reform, which did not pass. However we do think there's a way forward. As you know, there is talk that there may be some increase in taxes that could pass very soon which I think then should lead to them putting together a budget for FY16, which should then allow them to pursue this financing for the commonwealth, which is referred to sometimes as the PREPA financing of about $2.9 billion.

I think there's a clear way forward. And I think it is one of the situations where, because the value-added tax did not pass recently, that people are starting to understand that there really is the need to do something. And while there obviously are different political wins in motion here, I think something is likely to come fairly soon. But, again, we can't predict exactly when that will be. It is a complicated situation but I do think they are making progress despite some of the recent headlines.

I would also add that we have to look at this in the perspective of the time frames they've been trying to accomplish things. They put the value-added tax on the table in terms of an actual proposal less than six months ago and tried to get it through. If you think about tax reform anywhere in the United States, it's typically a multi-year negotiated process. So it was not unexpected that this was going to be a difficult thing to achieve.

And he almost got there, with the absence of six votes. I think it did the important thing, which it highlighted that there's got to be some additional revenues in addition to significant cost cuts in the operation of the government there. So, I wouldn't count the governor or his party out quite yet. This is only their first real stumble on what has been a two-year process of trying to bring some fiscal stability to what has been a complicated situation.

I appreciate the perspective very much. Thanks guys.

The next question comes from the line of Nagendra Jayanty.

I had one last question I forgot to ask before. I think that we've read some things, interviews with some of the sell-side analysts, that there may be cases where the Holding Company may provide support to MBIA Corp. as it relates to potentially Zohar or some other large exposure. And I'm just wondering how you may be thinking about that and what circumstances that might be the case? Thanks.

We don't anticipate the need for any kind of assistance. We think that MBIA Corp. has adequate resources to meet all of its obligations as they come due.

I think what you have to assume is one of the things you learn is you never say never and there could be circumstances where there would be a benefit to the Holding Company. I don't think at this point in time we've identified a particular sequence or circumstance where that would be the case.

Okay, thank you very much.

Our next question comes from the line of Pete Troisi of Barclays.

Hi, good morning, guys. I think Jay made a comment in the script about potentially eliminating the Mexico subsidiary of MBIA Corp. Just looking at the financials, it looked like the carrying value of that entity was about $12 million at year end included in Insurance Corp.'s surplus. So, can you just walk us through how the elimination of that subsidiary would work and what the potential impact to MBIA Corp.'s balance sheet would be?

Sure, this is Chuck. You're right. At year end we had about $12 million -- I think currently there's about $13 million of capital in the Mexico sub. There are two policies there and what we're attempting do is to get the two policies terminated and replaced with policies at MBIA Corp. so that they would become direct obligations of Corp. as opposed to reinsurance obligations of Corp., and then to liquidate the legal entity. So the $13 million of capital would be distributed to the parent. The real driver of it, though, is not so much the $13 million of capital but it is the operating expense associated with the care and feeding of the legal entity down there for two policies, which is just unnecessary.

Great, that makes sense. And then just one follow-up, going back to Zohar. You mentioned Zohar 1 and potential liquidity use there as the November maturity bullet approaches. If you were to make a payment there, would there be any read through for 2 that you would have to account for in potential reserving for Zohar 2?

It would depend on what actually causes a shortfall or a payment and its affect on other loans, and our interpretation of the carrying value and the managers interpretation. So, yes, you are correct, there could be an impact on Zohar 2 or Zohar 3 if there's a shortfall on Zohar 1 for loans that also recur in different denominations in the other two transactions.

If I could just add one thing to that. One is, we do reassess the reserve position every quarter and the liquidity impact is somewhat independent of that. And the other thing is, on Zohar 3, which has some of the same collateral as in 1 and 2, is not one that we have exposure to.

Okay, thank you.

Maybe just to be clear, the reserve we carry looks at both Zohar 1 and Zohar 2. When Chuck was speaking earlier in his comments we were just talking about the liquidity event, not the range of possible outcomes that occur across both transactions. We still show you on the line, Pete. Is there another question?

No that's it. Thanks very much guys.

At this time I'm showing no further questions. I'll turn the floor back over to Mr. Greg Diamond for any additional or closing remarks.

Thank you, Maria. Thanks to everyone who joined us for today's call. Please contact me directly if you have any additional questions. We also recommend that you visit our website at MBIA.com for additional information on our Company. Thank you for your interest in MBIA. Good day and goodbye.

Thank you, ladies and gentlemen. This does conclude today's call. You may now disconnect.